The newly launched iSTOXX Europe Demography 50 Index has been licensed to Credit Suisse to be used as the basis for Structured Products.
The new index provides a representation of companies from sectors that will be impacted by demographic changes, with an overlay of screens for high dividends and low volatility.
“The results of the overall continuing increase in life expectancy affects has many affects – one of them being the positive impact on certain industry sectors due to the changing behaviour of older age groups. The sophisticated iSTOXX Europe Demography 50 Index methodology identifies these sectors, which include amongst others the financials, leisure & luxury and pharmaceuticals,” says Hartmut Graf (pictured), chief executive officer, STOXX Limited. “Our new index, is a rules-based and transparent tool, that offers market participants access to sectors that are influenced by demographic changes, and in addition adds dividend and volatility screens.”
Amlan Roy of Credit Suisse’s Demographics & Pensions Research, says: “Demographics is widely misinterpreted and misunderstood, with a narrow view relating it to ‘age only’ or to ‘people count only’. We believe it is about people characteristics – consumers and workers. Everyone in this world is a consumer and a large proportion are workers, and they affect GDP, inflation, debt and asset prices. Historically unprecedented demographic changes are being reflected in consumer and worker behavior that differs across gender, generations, age, education, migrant status, technology access, etc. Consumption is the largest component of GDP and therefore consumer changes are important to monitor, and so is worker behavior. Consumers are revenue sources, and workers are costs, and within this interpretation they affect the income statements and balance sheets of every country. Further, demographic changes are not very predictable as they include behavior. They are not just long term as Greece, youth unemployment, and ageing Japan/Germany are affecting economic and macro fundamentals in the here and now. Ageing-related promises are a fiscal burden for most advanced old countries, but are also coming to bear on newly ageing countries such as Russia, China and Thailand.”
The iSTOXX Europe Demography 50 Index is derived from the STOXX Europe 600 Index and selects stocks from sectors that will be impacted by demographic changes and which pay high dividends and display low volatility. The sectors are selected not only due to the fact that the elderly population increases, but also that composition and behavior of different age groups within the population and structures of families change compared to the past.
In a first step, all companies are ranked into seven groups according to their Industry Classification Benchmark (ICB) sector code: Finance, Infrastructure, Leisure & Luxury, Pharmaceuticals, Resources, Real Estate and Telecom & Media & Tech. All stocks whose ICB sector is not relevant are excluded. In each group, the top dividend payers are selected. In a second step, all remaining companies are ranked in ascending order by their 12-month historical volatility. The top 50 constituents are selected while applying a 40-60 buffer rule and a cap of maximum of 15 stocks per group. All selected stocks are weighted according to the inverse of their 12-month historical volatility with a 10% cap.
The iSTOXX Europe Demography 50 Index is reviewed quarterly in March, June, September and December. The index is calculated in euro and US dollars, and available in price, net and gross return versions. Daily historical data is available from Mar. 22, 2004.